How to Calculate Total Return of Treasury Bonds
- 1). Use a time period relevant to the bond movement you want to capture. Treasury bonds are considered to be bond issues longer than 10 years in maturity. Treasury bills are issued with maturities under one year, and treasury notes have maturities under 10 years. When comparing a particular bond to a broad bond rally or a bearish downturn, use the period of time that measures the highest and lowest closing price of the fixed income move.
- 2). Compute the change in price by subtracting the ending price from the beginning price of the bond movement. This measures the capital gains portion of the bond move. This means the portion of total return measured by changes in interest rates and credit ratings. Note that discount bonds, or bonds below par or a price below 100, will always increase in price towards par as they approach maturity. Premium bonds always decline in price as they approach par at maturity.
- 3). Note that some treasury bonds trade in the market place when first issued. This means they are free to trade in the open market for several days without accruing interest until the bonds are actually delivered by the United States Treasury. Be certain, if measuring total return of newly issued bonds, that all accrued interest is accurately measured.
- 4). Compute accrued interest using the Treasury payment system. The Treasury assumes that there are 12 months each containing 30 days regardless of the actual number of days in each month. Divide the annual interest payment by 360 in order to compute a single day's interest. Add the total number of days necessary for the total return calculation.
- 5). Add the change in capital gains appreciation to the amount of interest earned. Divide this amount by the purchase price. The result is the total return for the holding period. For example, a bond priced at 100 that rises in price to 105 six months later has gained 5 points of principal value. If the coupon yield is 6 percent then a 3 percent semiannual coupon has been paid. The total return for the six months is 5 points of capital plus 3 points of income or 8 divided by the cost of 100. The return is 8 percent for the holding period.
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